Can I Afford To Sell My Business?
Sometime ago, I was working on a project with Gary Gardner, Certified Financial Planner extraordinaire. Gary counseled this client, "The question is not, "What is the value of your business?" rather it is, "Can you afford to sell your business?"
This was an eye-opener to me, and it made sense. I had been focusing on answering the wrong question all of these years. If the client got to the closing table and realized they couldn't afford to sell the business, no matter what the value of the business it wouldn't close. My work to get them a good deal would go for naught.
"Can I afford to sell or transition out of my business?" I call this the 1st question of exit strategy planning. (More on the 2nd question later.)
Value of Investments other than the Business
To answer the 1st question, you have to consider the value of other personal investments besides the business. It is even deeper than that, you have to define what "afford" means.
I've had clients that lived comfortably on $4000 per month and I've had clients that barely survived on $40,000 per month. How much money do you need to support your lifestyle; how much money do you need to pay the taxes and how much money do you plan to give away?
"Afford" is tied up with personal and family goals or to use Gary's fancy term, "Life Vision". So before selling or transition out of your business, you need to revisit your life vision.
Risks of Running out of Money before you Run out of Life
"Afford" also means having enough money to support your goals for the rest of your life. There are all kinds of risks lurking out there. You might live a lot longer than you planned; inflation might overwhelm you; interest rates may go against you; tax rates may go sky high to support the wars; social security may go broke and on and on.
One can't predict the future, but one can make an assessment of the risk of running out of money before you run out of life. You need to do a simulation of all the combinations of these variables and ascertain your risk. With today's computers, your financial planner can do this, and it gives a reasonable basis for determining how much personal investment you need now to achieve your goals. I call this simulation a Wealth Confidence Analysis.
If the answer is, "No"
If you can't answer, "Yes" to the 1st question, you may have to plan to retire later, increase the value of your business or reduce your lifestyle goals. Which will it be?
I know this sounds heavy, but think about it; transitioning out of your business is a significant and heavy event. For most business owners it is a one-time event. It takes heavy planning.
Exit Strategy Planning
I call it Exit Strategy Planning, and I won't take on a client to transfer their business unless they have been through the exit strategy planning process to assure they can answer, "Yes" to the 1st question, "Can I afford to sell or transition out of my business?"
Exit Strategy Planning also has a second question to be answered, "Yes" and that is, "Can I afford to die at midnight tonight?".